Q:
As a sole trader I have incurred VAT debts which have still to be finally assessed dating from 2004 to present. No legal action has started but Debt Management Unit have tried to contact me. I could probably repay over an extended period of several years but given the amount (c£55K) I guess they will go for bankrupcy which I wish to avoid. Can I transfer my business and VAT liabilty to a Ltd Co? Could have about £10K physical assets plus goodwill (traded for 12years) to transfer. The advantage to me would be if payment arrangement failed only the Ltd Co would suffer.
Should I be looking to a solicitor or an accountant for advice on this? Any comments appreciated.
A:
Hi Bobsmith
Sorry to hear that things have become so difficult. Unfortunately i don’t think that your proposal to transfer the VAT liability to a limited company would work for the reasons I’ve explained below.
But first of all, I strongly recommend that you get advice from an insolvency practitioner (an “IP”) – they have the experience with restructuring debts and dealing with HMRC that you need. In your circumstances, I’d suggest that you do this as soon as possible and certainly before HMRC start demanding payment.
Most accountancy firms and some solicitors have inhouse insolvency departments or you can look up independent IPs in your local area for advice. Nowadays there are several ways of dealing with debt and bankruptcy is usually the final resort. The most important thing is that you take proper advice before doing anything yourself that could make things worse.
With my own experience at dealing with HMRC over the decades, I think that it’s unlikely that they would allow an extended repayment for a VAT debt over a number of years. Usually such arrangements are spread over a period of months, rather than years. But nowadays there are several different types of insolvency arrangements including informal arrangements, so you could have several options for dealing with the debt without declaring yourself bankrupt. You can have a look at HMRC’s VAT Notice about insolvency and VAT debts here http://tinyurl.com/2u8vtq2 for more information.
About your idea to transfer the business and debt to a limited company to minimise your personal liability. In theory it is possible to transfer a business as a going concern (“TOGC”) to a limited company – see VAT Notice 700/9 here http://tinyurl.com/37ktle2 for more information about the VAT implications of TOGCs. However this in itself wouldn’t get rid of your personal liability as VAT liabilities always belong to the “taxable person”, ie yourself as a sole proprietor, regardless of any other legal arrangements involved regarding the debt.
In order to transfer the VAT debt to the company you have to transfer the VAT registration number to the company as explained in section 3.4 of the Notice. However I suspect that HMRC wouldn’t allow you to transfer the registration number because of the existing debt. HMRC also have other rights – as a creditor – that could affect your ability to register for VAT in the future, including in any other role such as company director.
Given the issues involved, it’s important that you make sure that you get proper advice about this as soon as possible so that you understand your options and make the best decision.
Good luck sorting things out.
Q:
Thanks for the very detailed response. Looks like I need some help with this. There are various firms that appear on the internet under ‘HMRC debts’ or similar searches and appear to do the job of negotiating with HMRC. Are they any better or worse than a local IP, who may be used to dealing mostly with consumer debt issues? I should say that Scots Law will apply
Thanks
A:
I guess that there are a number of options for finding the right person to give you the best advice! I have no idea whether the companies who advertise on the internet are any better or worse than debt management companies who are listed in your local business directories, thankfully I’ve never had to use any although I imagine that they all provide the same sort of service. I understand that most IPs deal with both personal and business insolvencies so you’d probably find that they all have similar experience.
But before getting an IP or any debt management company involved, you could also speak to someone from one of the free advisory services such as Money Advice Scotland or the Citizens Advice Bureau about your situation. They will give you a lot of information about different options that are available and more about how an IP could help you. Some of them will also help you with debt management arrangements free of charge and you may find that they can help you negotiate with HMRC without getting an IP involved. So it’s definately worth speaking to one or more of these organisations first.
If you decide that you need to take advice from an IP, the best place to start looking for an IP would be the official insolvency website. Here is the link to the website for the Scottish IP service http://www.aib.gov.uk/, There is a section called “Are you facing bankruptcy” with information about different insolvency options and also a link to the national register of IPs where you can have a look for someone in your local area.
If you want to deal with someone locally, you could ask round your business contacts for names of good accountants or solicitors in your area. Some will have inhouse IPs or will be able to refer you to a local IP.
Hope this helps you get the advice that you need.
Marie